Key Focus for the Week: Fed’s Policy and Apple’s Earnings

After a week filled with significant Big Tech earnings, the spotlight now shifts to two pivotal events set to unfold in the coming days: the Federal Reserve’s most recent policy announcement and the highly anticipated earnings report from Apple (AAPL).

Market Stability Amid Challenges

In light of the S&P 500 (^GSPC) entering correction territory last week, market participants are anxiously eyeing the United States’ central bank and the largest company within the index to provide stability, especially during these challenging months for investors.

Market Performance in Review

A substantial more than 2% drop across all three primary stock indexes last week has contributed to cumulative losses since August 1st, with the S&P 500 down by 10%, the Nasdaq (^IXIC) by 11.5%, and the Dow Jones Industrial Average (^DJI) by 9%.

Mixed Results for Big Tech

While quarterly reports from Alphabet (GOOG, GOOGL) and Meta Platforms (META) received a chilly reception last week, results from Microsoft (MSFT) and Amazon (AMZN) were more positive, though not sufficient to broadly lift investor sentiment.

A Multitude of Corporate Reports

In addition to Apple’s quarterly report, the week ahead is brimming with corporate results, including those from McDonald’s (MCD), AMD (AMD), Caterpillar (CAT), Qualcomm (QCOM), Eli Lilly (LLY), Pfizer (PFE), Airbnb (ABNB), and DoorDash (DASH).

Economic Calendar Highlights

Beyond the Federal Reserve’s policy announcement, the economic calendar for the week will deliver a pivotal October jobs report, crucial manufacturing activity indicators, and an update on job openings.

Fed’s Stance on Rates

Robust GDP data and the Federal Reserve’s preferred inflation measure last week have strengthened the case for the Fed to maintain elevated interest rates for an extended period. This may still be in line with September’s forecast of one more rate hike before concluding the current cycle.

Bank of America economists, led by Michael Gapen, noted, “[We] expect growth to slow in 4Q, but not significantly below trend.” Powell’s recent speech suggested the possibility of the Fed hiking rates in response to strong activity data, indicating it might not wait for inflation to surge again. There appears to be ample momentum in the economy to support one more hike.

Nonetheless, as of Friday afternoon, market expectations still implied a 97% likelihood that the central bank would keep rates within a range of 5.25% to 5.50% at the close of its two-day meeting on Wednesday.

Factors Influencing the Fed’s Decision

Michael Pearce, the lead US economist at Oxford Economics, contended that economic data is just one aspect shaping the Fed’s decision this week and could be an ongoing factor in maintaining elevated rates.

“The surge in bond yields means the Fed is likely to remain on hold next week and probably in December too,” Pearce explained.

Outlook for Rates

Pearce went on to say, “The stronger incoming data mean officials won’t rule out an additional rate hike, but it’s clear most officials see that as conditional on a continued re-strengthening in job growth and inflation, which we think is unlikely. We think the next move will be a cut, though the risks are skewed towards that loosening coming later than the May 2024 cut in our baseline.”

Earnings Momentum

With 49% of the S&P 500 having reported results through last week, blended annual earnings growth stood at 2.7%, potentially ending a three-quarters-long streak of earnings declines for the index.

Market Concerns

Despite this turnaround in earnings, current market concerns center around rising bond yields and the implications of the Fed’s “higher for longer” approach.

Market Correction Assessment

However, some analysts on Wall Street perceive the current market correction as more advanced than suggested by recent headlines. Keith Lerner, chief market strategist at Truist Wealth, remarked, “Markets now better reflect some of the many uncertainties that persist.”

Leaders’ Performance

Lerner also highlighted the performance of the “Magnificent Seven” stocks—Apple, Alphabet, Microsoft, Amazon, Meta, Tesla (TSLA), and Nvidia (NVDA)—which are collectively down an average of 17% from their recent highs. He noted, “toward the latter stages of a corrective phase, the leaders succumb to the broader market weakness.”